There can be no denying that yesterday’s lockup expiry trading in Twitter was nothing short of abysmal. Given how much CNBC hyped the potential selling, the carnage was all the more surprising. Have a look at the trading over the past couple of days:
TWTR trading over the past couple of days</a> </div>
It was not as if the stock was trading near the daily highs either. Over the past couple of months the stock had been steadily eroding. In fact it went into the lockup expiry near the all time low:
TWTR daily chart</a> </div>
The constant barrage of CNBC coverage for the expiry of the lockup in the previous week negates any chance that this was a surprise for the market.
Other large tech company IPO lockups have seen selling on the first day of free trading, but nothing compares to the disaster of yesterday’s Twitter performance. Bespoke came up with this great chart that outlined various other large tech IPO lockup expiries:
LinkedIn was the only company that came close, with an intraday decline of almost 12%, but even they managed to finish that day down only 6.5%.
Twitter opened down 5% and was a one way ticket lower all day – finishing down a whopping 18%.
I must confess that I thought that the publicity that CNBC gave during the previous week would create a “sell the rumour buy the fact” reaction. My assumption was that the price decline of the past few weeks was in anticipation of this lockup expiry. I believed that the selling would climax during the morning as some big buyer would use the liquidity offered to establish a large position.
Well… boy was I ever wrong.
Maybe some big buyer did use yesterday’s liquidity to establish a position. But even bigger sellers overwhelmed any buying.
In hindsight it is easy to say that this is the flip side of Twitter’s low float IPO launch. When they came public, they sold only 20% of the outstanding shares to the public. Memories of the Facebook face plant IPO were still fresh in everyone’s mind and Twitter wanted their IPO to be successful. No better way to ensure a smooth process than by restricting the number of shares.
However Twitter is now paying the price for this low float IPO. In essence yesterday’s lockup allowed 80% of the float to be sold directly into the marketplace in what can be said is the real IPO launch. The trouble was that this was not handled by a single underwriter setting the price. Instead it was a free for all stampede that started to feed on itself.
The real question that needs to be asked is whether this was a Twitter specific problem, or a more ominous clue about the health of the stock market.
Although I am willing to change my mind if Twitter would be able to stabilize and head higher over the next few days, I am concerned that this action is a bigger deal than most market participants realize.
At today’s Twitter price, the market value of the entire company is less than Zuckerberg paid for WhatsApp. I have long been skeptical of this entire social media bubble, but even I am scared by how far these stocks have fallen. If Twitter cannot rally, then I am worried that the rest of the space has a lot further to fall.
This selling also creates a lot of new supply. This lockup expiry just freed another $15 billion dollars of Twitter stock that could be hitting the market. That buying has to come from somewhere.
The whole situation reminds me of a lesson from the classic “Reminiscences of a stock operator.” In the book Jesse Livermore explained how the “pools” would run stocks higher with a massive campaign. During the run up, they would not sell any significant amount of stock. They would allow the stock to run as high as it could. When it finally broke, then they would sell. Investors would eagerly buy the dips, anticipating a return to the new highs. Of course, the return to the highs never came and the “pools” would distribute their stock to the public at inflated prices.
I am not suggesting that there is a “pool” running the Twitter stock. However, there is no doubt that the valuations in all of these social media companies are just plain stupid. What better way to liquidate your position than by floating a small amount of stock and letting the bubble grow with the appearance of a strong price. Then you finally sell at what seems like a lower price than the previous high, but which is way higher than if you sold the entire piece at the beginning.
Jesse Livermore would be so proud…
I think that we have entered into the liquidation phase of this bubble. It will be extremely difficult for this Twitter disaster to be shrugged off.
When we look back at this day, I think it will be easy to say that this was the day that it became obvious that the bubble for social media stocks was over.
I am already short Nasdaq, but I might use any strength that develops in the next couple of days to add to the trade.